All Business Interruption Policies provide cover for Increase in Cost of Working that compensates an Insured for any additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing a reduction in Turnover which would otherwise have taken place had the Increase in Cost of Working not been incurred.
To be considered an Increase in Cost of Working the expenditure needs to pass five tests:
- The expenditure has to be actually incurred.
- The expenditure must be additional to normal expenditure, not an increase in the ratio of a particular cost as compared to Turnover (See separate FAQ titled Polikoff).
- The expenditure needs to be necessarily and reasonably incurred.
- The expenditure must pass the sole purpose test, in that it must be incurred for the sole purpose of avoiding or diminishing a reduction in Turnover that otherwise would have occurred during the Indemnity Period (See separate FAQ titled What Constitutes an Increase in Cost of Working).
- The expenditure must pass the “economic limit test”, i.e. it is only recoverable to up to the maximum of the loss of Gross Profit/Gross Earnings etc. avoided as a result of incurring the expenditure, hence the common phrase ” you can’t spend more than a dollar to save less than a dollar”.
An Additional Increase in Cost of Working, generally relates to additional expenditure not otherwise recoverable elsewhere in the policy. The insurance under this item is typically limited to Additional Increase in Cost of Working necessarily and reasonably incurred during the Indemnity Period in consequence of the Damage for the purpose of avoiding or diminishing reduction in Turnover and/or resuming and/or maintaining normal business operations and/or services. It is a much broader wording than the Increase in Cost of Working definition and contemplates forms of expenditure which are not considered as an Increase in Costs of Working.
There are common themes between costs classified as an Increase in Cost of Working and an Additional Increase in Cost of Working. That is, both must be incurred within the maximum Indemnity Period and both must generally be necessarily and reasonably incurred.
Notwithstanding some common words within the definitions of an Increase in Cost of Working and an Additional Increase in Cost of Working, they are not the same. Fundamental differences include:
- An Additional Increase in Cost of Working cannot be an Increase in Cost of Working, because the basic definition of an Additional Increase in Cost of working says so. That is an Additional Increase in Cost of Working is a cost normally defined as not otherwise recoverable elsewhere in the policy.
- The Increase in Cost of Working cover is automatically included as part of the Gross Profit/Gross Earnings cover etc., whereas invariably an additional premium has to be paid to purchase Additional Increase in Cost of Working Cover.
- There is a separate sub-limit for an Additional Increase in Cost of Working that is stated in the policy schedule, whereas an Increase in Cost of Working does not have a sub-limit.
- An Additional Increase in Cost of working is not subject to the “economic limit test”.
- An Additional Increase in Cost of Working can benefit a business outside the Indemnity Period, whereas an Increase in Cost of Working is limited to costs incurred for the sole purpose of avoiding or diminishing a loss of Turnover during the Indemnity Period.
- Additional Increase in Cost of Working cover is not subject to the application of under-insurance whereas an Increase in Cost of Working is.
It is not uncommon to see a cost categorised as Additional Increase in Cost of Working, before any consideration as to whether it constitute an Increase in Cost of Working, such a categorisation is generally inappropriate, unless the Insured only has Additional Increase in Cost of Working cover. It is rare that costs incurred to maintain normal business operations do not contribute to some form of mitigation strategy. On this basis at least a proportion of the costs incurred would invariably fall for consideration as an Increase in Cost of Working and should be treated as such. It is only the remainder of the cost that is not recoverable as an Increase in Cost of Working that should then be considered as an Additional Increase in Cost of Working.
There is some debate as to whether the cover for Additional Increase in Cost of Working extend to include uninsured elements of an Increase in Cost of Working by virtue of the under-insurance provision. Those that believe this is not the case argue that the Increase in Costs of Working claimed are covered elsewhere under the policy, it is just that they are not fully covered and therefore do not rank for consideration as an Additional Increase in Cost of Working.
Typically it is market practice in Australia to include any under-insured component of an Increase in Cost of Working as an Additional Increase in Cost of Working.
